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WABCO is a leading provider of electric and electromechanical products for the worldâ€™s leading commercial truck, trailer, bus and passenger car manufacturers. We manufacture and sell control systems, including advanced braking, stability, suspension, transmission control and air compressing and processing systems, that improve vehicle performance and safety and reduce overall vehicle operating costs. Based on internal estimates, we estimate that our products are included in approximately two out of three commercial vehicles with advanced vehicle control systems and offered in sophisticated, niche applications in cars and sport utility vehicles (SUVs). We continue to grow in more parts of the world as we provide more components and systems throughout the life of a vehicle, from design and development to the aftermarket.

History of Our Company

WABCO was founded in the United States in 1869 as Westinghouse Air Brake Company. We were purchased by American Standard Companies Inc. (or â€śAmerican Standardâ€ť) in 1968 and operated as the Vehicle Controls Systems business division within American Standard until we were spun off from American Standard on July 31, 2007. Subsequent to our spin off, American Standard changed its name to Trane Inc., which we refer to herein as â€śTraneâ€ť.

The Separation of WABCO from Trane

The spin off by Trane of its Vehicle Controls Systems business became effective on July 31, 2007, through a distribution of 100% of the common stock of WABCO to the holders of record of Traneâ€™s common stock on July 19, 2007 (the â€śDistributionâ€ť). The Distribution was effected through a separation and distribution agreement pursuant to which Trane distributed all of the shares of WABCO common stock as a dividend on Trane common stock, in the amount of one share of WABCO common stock for every three shares of outstanding Trane common stock to each stockholder on the record date. Trane received a private letter ruling from the Internal Revenue Service and an opinion from tax counsel indicating that the spin-off was tax free to the stockholders of Trane and WABCO. Please refer to Item 1A of Part I â€śRisk Factorsâ€ť below for information on the tax risks associated with the spin off from Trane.

Our Relationship with Trane

On July 16, 2007, we entered into definitive agreements with Trane that, among other things, set forth the terms and conditions of our separation from Trane (â€śSeparationâ€ť) and provide a framework for the relationship between WABCO and Trane following the Separation. These agreements govern our relationship with Trane subsequent to the completion of the Separation and provide for the allocation between WABCO and Trane of assets, liabilities and obligations attributable to periods prior to the Separation. In addition to the Separation and Distribution Agreement, which contains many of the key provisions related to the Separation of WABCO and the Distribution of WABCOâ€™s common stock to Traneâ€™s shareholders, the parties also entered into a Tax Sharing Agreement, a Transition Services Agreement, an Employee Matters Agreement and an Indemnification and Cooperation Agreement. A summary of each such agreement is set forth below:

Separation and Distribution Agreement â€“ sets forth WABCOâ€™s agreements with Trane regarding principal transactions necessary to separate WABCO from Trane. This agreement also sets forth the other agreements that govern certain aspects of WABCOâ€™s relationship with Trane after the completion of the Separation from Trane and provides for the allocation of certain assets to be transferred, liabilities to be assumed and contracts to be assigned to WABCO and Trane as part of the Separation.

Tax Sharing Agreement â€“ governs the partiesâ€™ respective rights, responsibilities and obligations after the Distribution with respect to taxes, including ordinary course of business taxes and taxes, if any, incurred as a result of any failure of the Distribution of all of the common shares of WABCO to qualify as a tax-free distribution for U.S. federal income tax purposes within the meaning of Section 355 of the Internal Revenue Code of 1986, as amended.

Transition Services Agreement â€“ governed the orderly transition of WABCO becoming an independent company. Under the Transition Services Agreement, WABCO and Trane agreed to provide each other with various services, including services relating to human resources, payroll, treasury and risk management, environmental technology, tax compliance, telecommunications services and information technology services. The cost of each transition service was generally on the same payment terms and calculated using the same cost allocation methodologies for the particular service as those associated with the costs in the historical financial statements. The majority of the services provided under the transition services agreement expired on February 1, 2008.

Employee Matters Agreement â€“ allocates liabilities and responsibilities relating to employee compensation and benefit plans and programs and other related matters in connection with the Separation, including the treatment of outstanding incentive awards and certain retirement and welfare benefit obligations, both in and outside of the United States. For further detail, please refer to Note 5 â€“ Stock-Based Compensation in the notes to the consolidated financial statements.

Indemnification and Cooperation Agreement â€“ Pursuant to this agreement, WABCO Europe BVBA (an indirect wholly-owned subsidiary of WABCO), has agreed to be responsible for and to indemnify American Standard (now Trane) and its subsidiaries (including certain subsidiaries formerly engaged in the Bath and Kitchen business) and their respective affiliates against any fines related to the European Commissionâ€™s investigation, as outlined in a Statement of Objections received by American Standard and certain of its European subsidiaries on March 28, 2007, into possible infringement of European Union competition regulations. For further detail, please refer to Legal Proceedings below and Note 13 â€“ Warranties, Guarantees, Commitments and Contingencies in the notes to the consolidated financial statements.

Products and Services

We develop, manufacture and sell advanced braking, stability, suspension and transmission control systems primarily for commercial vehicles. Our largest-selling products are pneumatic anti-lock braking systems (ABS), electronic braking systems (EBS), automated manual transmission systems, air disk brakes, and a large array of conventional mechanical products such as actuators, air compressors and air control valves for heavy- and medium-sized trucks, trailers and buses. We also supply advanced electronic suspension controls and vacuum pumps to the car and SUV markets in Europe and North America. In addition, we sell replacement parts, diagnostic tools, training and other services to commercial vehicle aftermarket distributors, repair shops, and fleet operators.

WABCO is a leader in improving highway safety, with products that help drivers avoid accidents by enhancing vehicle responsiveness and stability. For example, we offer a stability control system for trucks and buses that constantly monitors the vehicleâ€™s motion and dynamic stability. If the system detects a vehicle instability such as the driver swerving to avoid another vehicleâ€”it responds by applying the brakes at specific wheels, or slowing the vehicle down to minimize the risk of instability or a rollover.

Key Markets and Trends

Electronically controlled products and systems are an important growth segment of our business. The market for these products is driven primarily by the growing electronics content of control systems in commercial vehicles. The electronics content has been increasing steadily with each successive platform introduction, as original equipment manufacturers (OEMs) look to improve safety and performance through added functionalities, and meet evolving regulatory safety standards. Although the pace varies, there are growth trends in all major geographies, and braking systems are part of this broader shift from conventional to advanced electronic systems. In addition to increasing safety, improving stopping distances, and reducing installation complexity, advanced EBS also allow for new functionality to be introduced into vehicles at a lower price. The new functionality includes stability control, adaptive cruise control, automated transmission controls, brake performance warning, vehicle diagnostics, driver assistance systems and engine braking/speed control. Adaptive cruise control uses sensors to detect proximity to other vehicles and automatically adjusts speed. Automated transmission controls reduce the amount of gear shifting, resulting in less physical effort and training required for drivers, less component wear, fewer parts, better fuel efficiency, and enhanced driver safety and comfort.

A fundamental driver of demand for our products is commercial truck production. Commercial truck production generally follows a multi-year cyclical pattern. While the number of new commercial vehicles built fluctuates each year, we have demonstrated the ability to grow in excess of these fluctuations by increasing the amount of content on each vehicle. For example, over the past 5 years, WABCOâ€™s European sales to truck and bus (â€śT&Bâ€ť) OEM customers grew at an average annual rate of approximately 12%, excluding the impact of currency exchange rates, which outperformed the Western European T&B production.

Customers

We sell our products primarily to four groups of customers around the world: truck and bus (OEMs), trailer (OEMs), commercial vehicle aftermarket distributors for replacement parts and services, and major car manufacturers. Our largest customer is Daimler, which accounts for approximately 14% of our sales. Other key customers include Arvin Meritor, Cummins, Fiat (Iveco), Ford, General Motors, Hino, Hyundai, International Truck & Engine Corporation (ITE), MAN Nutzfahrzeuge AG (MAN), Meritor WABCO (a joint venture), Nissan Diesel, Paccar (DAF Trucks N.V. (DAF), Kenworth, Leyland and Peterbuilt), Otto Sauer Achsenfabrik (SAF), Scania, Volvo (Mack and Renault) and ZF Friedrichshafen AG (ZF). For the fiscal year ended December 31, 2007, our top 10 customers accounted for approximately 54% of our sales. In 2007, WABCO was nominated to become Daimlerâ€™s future exclusive supplier of ABS and EBS wheel speed sensors for Europe, North America, and South America. In addition, WABCOâ€™s success in serving emerging markets was evidenced by receiving several distinguished supplier awards from Yutong and CNHTC in 2007.

The largest group of our customers, representing approximately 60% of sales, consists of truck and bus OEMs who are large, increasingly global and few in number due to continued consolidation (driven largely by European players). As truck and bus OEMs grow globally, they expect suppliers to grow with them beyond their traditional markets and become reliable partners, especially in the development of new technologies. WABCO has a strong reputation for technological innovation and often collaborates closely with major OEM customers to design and develop the technologies used in its products. Our products play an important role in vehicle safety and there are few other suppliers who compete across the breadth of products that we supply. As a result, pricing pressure, though increasing, is generally lower than for providers of more commoditized products or passenger cars and light truck product suppliers.

The second largest group, representing approximately 21% of sales, consists of the commercial vehicle aftermarket distributor network that provides replacement parts to commercial vehicle operators. This distributor network is a fragmented and diverse group of customers, covering a broad spectrum from large OE-affiliated or owned distributors to small independent local distributors. The increasing number of commercial trucks in operation world-wide that are equipped with our products continuously increases demand for replacement parts and services, thus generating a growing stream of recurring aftermarket sales. Additionally, we intend to develop an array of service offerings such as diagnostics, training and other services to repair shops and fleet operators that will further enhance our presence and growth in the commercial vehicle aftermarket.

The next largest group, representing approximately 14% of sales, consists of trailer manufacturers. Trailer manufacturers are also a fragmented group of local or regional players with great diversity in business size, focus and operation. Trailer manufacturers are highly dependent on suppliers such as WABCO to provide technical expertise and product knowledge. Similar to truck and bus OEMs, trailer manufacturers rely heavily on our products for important safety functions and superior technology.

The smallest group, representing approximately 5% of sales, consists of car and SUV manufacturers to whom WABCO sells electronic air suspension systems and vacuum pumps. Electronic air suspension is a luxury feature with increasing penetration and above market growth. Vacuum pumps are used with diesel engines and, therefore, enjoy higher than average growth rates associated with increasing diesel applications in Europe and Asia. These customers are typically large, global, sophisticated and demand high product quality and overall service levels.

We address our customers through a global sales force that is organized around key accounts and customer groups and interfaces with product marketing and management to identify opportunities and meet customer needs across its product portfolio.

Europe represents approximately 76% of our sales, with the remainder coming primarily from the Americas and Asia. Our products are also manufactured in Europe, Asia and in the Americas.

Backlog

Information on our backlog is set forth under Item 7 â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€“ Backlogâ€ť of this annual report.

Cyclical and Seasonal Nature of Business

Information on the cyclical and seasonal nature of our business is set forth under Item 7 â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€“ Cyclical and Seasonal Nature of Businessâ€ť of this annual report.

Growth Strategy

Our growth strategy is focused on four key platforms: technology innovation, geographic expansion, aftermarket growth and opportunistic automotive application of our products and systems. Drivers of growth for both our aftermarket and advanced car systems are discussed in â€śCustomersâ€ť above.

Technology

We continue to drive growth by utilizing our industry-leading expertise in developing electronically controlled systems, including braking, transmission automation, air suspension and air management systems. We have a strong track record of innovation and are responsible for some of the industryâ€™s most important innovations including:

â€˘

First heavy-duty truck anti-lock braking system (ABS);

â€˘

First electronically controlled air suspension (ECAS) system for commercial vehicles;

First electronic stability control (ESC) system for commercial vehicles; and

â€˘

First collision safety system with active braking developed for the North American market, based on Adaptive Cruise Control technology (ACC).

We continue to expand our product and technology portfolio by introducing new products and functionalities, and by improving the penetration of recently launched technologies. Advanced products and functionalities are typically developed and adopted first in Europe and then migrate to North America and Asia. Important examples include the adoption of ABS and automated transmission systems that were first widely adopted in European markets before starting to penetrate North America. Over the last three years, we spent approximately $230 million for research activities, product development and product engineering.

We are also focused on longer-term opportunities, particularly in the areas of emissions controls and Driver Assistance Systems (DAS). DAS is a technology concept that involves connecting advanced sensors with truck control devices, such as braking and steering systems as well as engine controls, to improve safety and avoid collisions. We have already launched some of the elements that would allow this concept to be brought to market, such as the adaptive cruise control already in use by several OEMs, and are well positioned for future growth in this area.

Geographic Expansion

We continue to drive sales in high growth markets in Eastern Europe, China and India. In Eastern Europe, we have been manufacturing products since 2001. The market in Eastern Europe has been experiencing rapid growth and we have established relationships with local customers.

China is a key growth market for us. The number of trucks built in the country is continuing to increase and adoption of the advanced systems and products made by us is increasing. We have been in China since 1996 and are the leading provider of ABS systems, with a strong brand and established customer relationships. In the short-to medium-term, growth will be driven by the enforcement of existing regulations making ABS mandatory on trucks, buses and trailers, of which we are well positioned to take advantage. Additional near term growth will be driven by introducing new products into the local market such as air compressors, clutch servos and automated manual transmission systems. To serve the growing demand for products both in China and for export, we have two facilities to manufacture conventional products, advanced systems such as ABS, and new modular air compressors. In order to make sure opportunities in Asia receive enough focus and management attention we have increased our management presence in the region.

India is another future growth market for us due to the number of trucks being built as well as the expected future adoption of more advanced systems in commercial vehicles. We participate in the market through a joint venture with the TVS Group (Sundaram-Clayton Ltd.) (â€śSCLâ€ť), which sells primarily conventional braking products, as the more advanced systems have only started to be introduced. India also provides us a strong base for sourcing and engineering activities, which we are actively developing. The joint venture is described further below in the section entitled â€śJoint Ventures.â€ť

Competition

Given the importance of technological leadership, vehicle life-cycle expertise, reputation for quality and reliability, and the growing joint collaboration between OEMs and suppliers to drive new product development, the space in which we mostly operate has not historically had a large number of competitors. Our principal competitors are Knorr-Bremse (Knorrâ€™s U.S. subsidiary is Bendix Commercial Vehicle Systems) and, in certain categories, Haldex. In the advanced electronics categories, automotive players such as Bosch (automotive) and Continental (including Siemens-VDO) have recently been present in some commercial vehicle applications. In the mechanical product categories, several Asian competitors are emerging, primarily in China, although they are more focused on low complexity mechanical products rather than the advanced electronic systems that we emphasize.

Manufacturing and Operations

Most of our manufacturing sites and distribution centers produce and/or house a broad range of products and serve all different types of customers. Currently, over 45% of our manufacturing workforce is located in low cost countries such as China and Poland compared with approximately 10% in 1999. Facilities in low cost countries have helped reduce costs on the simpler and more labor-intensive products, while the facilities in Western Europe are focused on producing more complex technologies. All facilities globally are deploying Six Sigma Lean initiatives to improve productivity and reduce costs. By applying the Six Sigma philosophy and tools we seek to improve quality and predictability of our process. Lean is geared towards eliminating waste in our supply chain, manufacturing and administrative processes. Both methodologies are customer driven and data based. In addition, our global supply chain team makes decisions on where to manufacture which products taking into account such factors as local and export demand, customer approvals, cost, key supplier locations and factory capabilities.

Our global sourcing organization purchases a wide variety of components including electrical, electro-mechanical, cast aluminum products and steel, as well as copper, rubber and plastic containing components that represent a substantial portion of manufacturing costs. We source products on a global basis from three key regions: Western Europe, Central and Eastern Europe and Asia. To support the continuing shift of manufacturing to low cost countries, we also continue to shift more of our sourcing to low cost regions. Under the leadership of the global sourcing organization, which is organized around commodity and product groups, we identify and develop key suppliers and seek to integrate them as partners into our extended enterprise. Many of our western suppliers are accompanying us on our move to low cost countries. Since 1999, the share of sourcing from low cost regions has increased from 10% to approximately 36%.

We have developed a strong position in the design, development, engineering and testing of products, components and systems. We are generally regarded in the industry as a systems expert, having in-depth technical knowledge and capabilities to support the development of advanced technology applications. Key customers depend on us and will typically involve us very early in the development process as they begin designing next generation platforms. We have over 800 employees dedicated to developing new products, components and systems as well as supporting and enhancing current applications. Our â€śfront-endâ€ť sales organization hosts application engineers that are based near customers in all regions around the world and are partially resident at some customer locations. We also have significant resources in low cost countries performing â€śback-endâ€ť functions such as drawings, testing and software component development. We operate test tracks in Germany, Finland (for extreme weather test conditions) and India (through our SCL joint venture).

Joint Ventures

We use joint venture partners globally to expand and enhance our access to customers. Our important joint ventures are:

â€˘

A 50 percent owned joint venture in North America with Arvin Meritor Automotive Inc. (Meritor WABCO) that markets ABS and other vehicle control products.

â€˘

A majority-owned (70%) partnership in the U.S. with Cummins Engine Co. (WABCO Compressor Manufacturing Co.), a manufacturing partnership formed to produce air compressors designed by WABCO.

â€˘

A majority-owned joint venture (70%) in China with Mingshui Automotive Fitting Factory (MAFF) that provides conventional mechanical products to the local market.

â€˘

A majority-owned joint venture (90%) in Japan with Sanwa-Seiki that distributes WABCOâ€™s products in the local market.

â€˘

Minority equity investment in a joint venture in India with the TVS Group (SCL) (39%). The joint venture currently manufactures and sells both brakes and non-brakes related products; however we and our Indian joint venture partner have agreed to separate the non-brakes division from the brakes division through a plan of demerger, which is conditioned on various Indian regulatory and court approvals. If these conditions are met, the brakes business of SCL will be transferred to a new subsidiary, WABCO-TVS (INDIA) Ltd., the shares of which are intended to be listed in India as are the shares of SCL currently. See Item 7 â€śManagementâ€™s Discussion and analysis of Financial Condition and Results of Operations â€“ Equity in Net Income of Unconsolidated Joint Ventures and Other Income/(Expense)â€ť, for more detail on the demerger.

â€˘

A minority equity investment in a joint venture in South Africa, where we have a 49% ownership joint venture with Sturrock & Robson Ltd (WABCO SA), a distributor of braking systems products.

Employees

We have approximately 7,700 employees. Approximately 50% of our employees are salaried and 50% are hourly. Approximately 83% of our workforce is in Europe, 10% is in Asia, and the remaining 7% is in the Americas. All but approximately 1,440 of our employees are permanent employees. Approximately 290 of the non-permanent employees are leased through employment agencies and approximately 1,150 have limited term contracts. Approximately 800 employees work in engineering/product development.

Employees located in our sites in Europe, Asia and South America are subject to collective bargaining, with internal company agreements or external agreements at the region or country level. Currently 97% of our workforce is covered by a collective bargaining agreement and 95% of those agreements expire within the current year. These employeesâ€™ right to strike is typically protected by law and union membership is confidential information which does not have to be provided to the employer. The collective bargaining agreements are typically renegotiated on an annual basis. Our U.S. facilities are non-union. We have maintained good relationships with our employees around the world and historically have experienced very few work stoppages.

Intellectual Property

Patents and other proprietary rights are important to our business. We also rely upon trade secrets, manufacturing know-how, continuing technological innovations, and licensing opportunities to maintain and improve our competitive position. We review third-party proprietary rights, including patents and patent applications, as available, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party proprietary rights, identify licensing opportunities, and monitor the intellectual property claims of others.

We own a large portfolio of patents that principally relate to our products and technologies, and we have, from time to time, licensed some of our patents. Patents for individual products and processes extend for varying periods according to the date of patent filing or grant and the legal term of patents in various countries where patent protection is obtained.

The WABCO brand is also protected by trademark registrations throughout the world in the key markets in which our products are sold.

While we consider our patents and trademarks to be valuable assets, we do not believe that our competitive position is dependent upon patent and trademark protection or that our operations are materially dependent upon any single patent or group of related patents.

Environmental Regulation

Our operations are subject to local, state, federal and foreign environmental laws and regulations that govern activities or operations that may have adverse environmental effects and which impose liability for clean-up costs resulting from past spills, disposals or other releases of hazardous wastes and environmental compliance. Generally, the international requirements that impact the majority of our operations tend to be no more restrictive than those in effect in the U.S.

A number of our facilities are undertaking responsive actions to address groundwater and soil issues. We are currently a potential party to remedial actions under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and similar state statutes at one location. The Superfund liability relates to Traneâ€™s Bath and Kitchen business prior to the sale of that business and was assumed by WABCO under the Separation & Distribution Agreement as part of the Separation. Expenditures in 2007 to evaluate and remediate these sites were not material.

Additional sites may be identified for environmental remediation in the future, including properties previously transferred and with respect to which the Company may have contractual indemnification obligations.

CEO BACKGROUND

G. Peter Dâ€™Aloiaâ€”Age 63

Director since July 2007

Mr. Dâ€™Aloia is Senior Vice President and Chief Financial Officer of Trane Inc., a position he has held since 2000. Before joining Trane, Mr. Dâ€™Aloia worked for Honeywell where he most recently served as Vice Presidentâ€”Business Development. He spent 27 years with Honeywellâ€™s predecessor company, AlliedSignal, in diverse finance management positions. During his career with AlliedSignal, he served as Vice Presidentâ€”Taxes; Vice President and Treasurer; Vice President and Controller; and Vice President and Chief Financial Officer for the Engineered Materials Sector. Early in his career, he worked as a tax attorney for the accounting firm, Arthur Young and Company. Mr. Dâ€™Aloia is a Director of FMC Corporation and AirTran Airways.

Juergen W. Gromerâ€”Age 63

Director since July 2007

Dr. Gromer is the retired President of Tyco Electronics, a position which he held from April 1999 until December 31, 2007. Dr. Gromer also served as the Vice Chairman of Tyco Electronics from January 2006 until December 31, 2007. Dr. Gromer formerly held senior management positions from 1983 to 1998 at AMP (acquired by Tyco in April 1999) including Senior Vice President of Worldwide Sales and Services, President of the Global Automotive Division, and Vice President of Central and Eastern Europe, and General Manager of AMP Germany. Dr. Gromer has over 20 years of AMP and Tyco Electronics experience, serving in a wide variety of regional and global assignments. Dr. Gromer serves as a member of the boards of directors of Tyco Electronics Ltd., Bermuda, Marvell Technology Group Inc. and RWE Rhein Ruhr AG. He is also Chairman of the Board of the Society for Economic Development of the District Bergstrasse/Hessen, a member of the Advisory Board of Commerzbank, and a Director of the Board and Vice President of the American Chamber of Commerce in Germany.

James F. Hardymonâ€”Age 73

Director since July 2007

Mr. Hardymon currently serves as, and is expected to continue serving as, our Chairman of the Board. Mr. Hardymon served as a director of Trane from 1999 to 2007. Mr. Hardymon was the Chairman and Chief Executive Officer of Textron, Inc., a manufacturing and financial services business, from 1993 to 1998 and continued as Chairman until his retirement in 1999. Previously, Mr. Hardymon had been Chief Executive Officer since 1992, and President and Chief Operating Officer since 1989. Prior to his affiliation with Textron, he served from 1961 to 1989 in various executive capacities with Emerson Electric Co. Mr. Hardymon is a director of Circuit City Stores, Inc. and Lexmark International, Inc. Mr. Hardymon is also a member of the Advisory Board of Investcorp International, Inc. Including WABCO, Mr. Hardymon has served on 11 corporate boards and as chairman of four NYSE-traded companies.

Michael T. Smithâ€”Age 64

Director since July 2007

Mr. Smith served as the Chairman of the Board and Chief Executive Officer of Hughes Electronics Corporation from 1997 to 2001, before retiring in 2001. Prior to his election to those positions, Mr. Smith had been Vice Chairman of Hughes Electronics and Chairman of the Hughes Aircraft Company. Mr. Smith joined Hughes Electronics in 1985 as Senior Vice President and Chief Financial Officer after spending nearly 20 years with General Motors in a variety of financial management positions. In 1992 he was elected Vice Chairman of Hughes Missile Systems, and in 1995 he was elected Chairman of Hughes Aircraft Company. Mr. Smith is a member of the board of directors of Alliant Techsystems, Inc., Ingram Micro, Inc., Teledyne Technologies, Inc. and Flir Systems, Inc.

John F. Fiedlerâ€”Age 69

Director since September 2007

Mr. Fiedler served as Chairman of the Board of Directors of BorgWarner, Inc from 1995 to 2003, before retiring in 2003. Prior to that, Mr. Fiedler served as President and Chief Operating Officer of Borg Warner, Inc. Before joining BorgWarner in 1994, Mr. Fiedler was an Executive Vice President with The Goodyear Tire & Rubber Company, culminating a 29-year career with the company by leading its North American tire division. He is a member of the board of directors of Mohawk Industries, Snap-On Corporation and AirTran Airways. He is also a member of the Kent State Foundation Commission, an advisor to the Board of Trustees of the Manufacturers Alliance/MAPI and a member of the Board of Advisors of Prism Funds.

Jacques Esculierâ€”Age 48

Director since July 2007

Mr. Esculier has served as our Chief Executive Officer and director since July 2007. Prior to July, 2007, Mr. Esculier served as Vice President of Trane and President of its Vehicle Control Systems business, a position he had held since January 2004. Prior to holding that position, Mr. Esculier served in the capacity of Business Leader for the Trane Commercial Systemsâ€™ Europe, Middle East, Africa, India & Asia Region from 2002 through January 2004. Prior to joining Trane in 2002, Mr. Esculier spent more than six years in leadership positions at AlliedSignal/Honeywell. He was Vice President and General Manager of Environmental Control and Power Systems Enterprise based in Los Angeles, and Vice President of Aftermarket Servicesâ€”Asia Pacific based in Singapore.

Kenneth J. Martinâ€”Age 53

Director since July 2007

Mr. Martin served as the Chief Financial Officer and Vice Chairman of Wyeth (formerly American Home Products) from 2000 to 2007, before retiring in 2007. Mr. Martin joined American Home Products in 1984 as Assistant Director of Corporate Compliance and subsequently held the positions of Assistant Vice President of Finance for American Home Food Products. In 1989, he was appointed Vice President and Comptroller of American Home Products Corporation. In 1992, he became Executive Vice President for American Home Food Products. Two years later, he was promoted to Executive Vice President of Whitehall-Robins Healthcare and in 1995, President of American Home Food Products. He was named President of Whitehall-Robins Healthcare in 1997 and Senior Vice President and Chief Financial Officer of Wyeth-Ayerst Pharmaceuticals in 1998. In 2000, he was appointed Senior Vice President and Chief Financial Officer of Wyeth and in 2002, he was named Executive Vice President and Chief Financial Officer. Mr. Martin is also a director of Talecris Biotherapeutics Holdings Corp.

Donald J. Stebbinsâ€”Age 50

Director since September 2007

Mr. Stebbins is President and Chief Operating Officer of Visteon Corporation, a position he has held since 2005. Mr. Stebbins joined Visteon from the Lear Corporation where he spent 13 years in a number of executive positions, the most recent of which was President and Chief Operating Officer for the corporationâ€™s Europe, Asia and Africa region. Before assuming this position, Mr. Stebbins served as President and Chief Operating Officer for the Americas. He started his career at Lear as Vice President and Treasurer in 1992 and was appointed Senior Vice President and Chief Financial Officer in 1997. Mr. Stebbins is a member of the board of directors of Visteon.

COMPENSATION

Components of Executive Compensation

Base Salary

As discussed above under â€śIncreases to Our Chief Executive Officer and Chief Financial Officerâ€™s Cash Compensation in Connection with Spin-Off,â€ť the base salary of each of our Chief Executive Officer and Chief Financial Officer was established by the Trane MDC Committee. The base salaries of our other named executive officers were established by Trane prior to the Spin-off and were not adjusted in connection with the Spin-off. Where appropriate, our CNG Committee will consider base salary adjustments in response to market data from our peer group, retention concerns and to reward superior performance. In February 2008, our CNG Committee approved an increase in base salary for Mr. Varty, our Vice Presidentâ€”Compression and Braking, from $233,000 to $303,000. This increase was designed to bring Mr. Vartyâ€™s base salary closer to the 50 th percentile for similarly situated executives in our peer group, as well as to bring his salary up to a level that was more appropriate in relation to the base salaries of our other named executive officers.

Variable Cash Compensation

Currently we offer a cash-based annual incentive program (â€śAIPâ€ť) and a cash-based three-year long-term incentive program (â€śLTIPâ€ť) for our executive officers, including our named executive officers. Awards under both the AIP and the LTIP are issued under the Omnibus Incentive Plan. The CNG Committee seeks to establish performance goals for the new AIP and LTIP performance periods at its first or second calendar meeting each year.

Annual Incentive Plan (â€śAIPâ€ť)

Each year, our CNG Committee will establish an annual incentive program for our executive officers, including our named executive officers, and key managers based upon achievement of financial, strategic, and individual performance goals. Each year an operating plan is established that sets goals for overall corporate performance with specific financial and non-financial measures. AIP awards are expected to target the 50 th percentile of our peer group. The actual payment under an AIP award may be above the 50 th percentile in years of strong performance against objectives or below the 50 th percentile or zero, depending on the actual level of performance achieved.

Fiscal Year 2007 Annual Incentive Plan

In January 2007, the Trane MDC Committee determined the maximum amounts payable to executive officers of Trane, including Jacques Esculier, for AIP awards for the 2007 performance year by establishing a pool equal to 1.75% of 2007 Trane segment income with 20% of the pool allocated to the Trane Chief Executive Officer and the remainder allocated evenly among the other executive officers. The AIP pool established by the formula described above was not necessarily an expectation of awards that would be paid. It represented the maximum amount that the Trane MDC Committee could approve as performance based compensation in accordance with Section 162(m) of the U.S. Internal Revenue Code. The Trane MDC Committee generally exercises its discretion to pay less than the maximum amount after considering the factors in the management plan described below. At its first meeting in July 2007, the CNG Committee approved the adjustment of the AIP pool to include 1.75% of segment income for Trane through July 2007 and 0.5% of WABCO EBIT for the period of August-December 2007. Achievement of Trane segment income of $753,700,000 for the seven-month period ending July 31, 2007 and 0.5%, or $112,400,000, of WABCO EBIT for the period of August-December 2007, created a maximum AIP award of $1,734,422 for WABCOâ€™s Chief Executive Officer.

The Trane MDC Committee also administered an annual incentive program for key managers based on achievement of financial, non-financial and individual performance goals. The performance goals established by the Trane MDC Committee included financial goals of sales growth, gross profit margin, management net income and free cash flow and non-financial goals related to six sigma, materials management, safety, talent development and strategic initiatives. Free cash flow refers to net cash provided by operating activities less any amounts attributable to the purchase of property, plant, equipment and computer software and the proceeds from the disposal of property. Management net income refers to an internal net income measure used by Trane in which Traneâ€™s overall taxes and interest expenses are allocated to the individual business units based on a preset formula. Payouts under this program are based on the level of goal achievement multiplied by the participantâ€™s annual target bonus percentage. Annual target bonus percentages under this program are established for each participant as a percentage of base salary, and in the case of Messrs. Esculier, Michel and Figueroa such percentages are stipulated by their respective employment agreements.

The performance for 2007 against the stated objectives was calculated taking into account full year results for WABCO. Our Omnibus Incentive Plan authorizes the CNG Committee to revise stated objectives in response to extraordinary events not contemplated at the time the annual incentive plan was adopted. At its meeting in December 2007, the CNG Committee agreed that it would be appropriate to revise the actual 2007 financial results achieved by WABCO in order to account for the effect and impacts of WABCOâ€™s separation from Trane. As a result, the CNG Committee agreed to revised financial results that reflected the elimination of certain expenses and charges related solely to WABCOâ€™s separation from Trane in order to reflect comparable 2007 WABCO results with the original planned targets. Thus, for purposes of determining annual incentive payouts, the CNG Committee determined that the company had achieved 112.3% of its adjusted sales growth goal, 33.7% of its adjusted gross profit margin growth goal, 200.0% of its adjusted management net income growth goal, and 145.9% of its adjusted free cash flow growth goal.

Measuring achievement of the non-financial goals included in the 2007 AIP is in the discretion of the CNG Committee and, unlike the financial goals, the company is not required to achieve specific levels of performance in all or any of the goal categories in order to qualify for payout under the plan. The CNG Committee reviewed the companyâ€™s results against the non-financial performance goals stated above, and although the company did not meet its stated objectives in 2007 in respect to materials management and safety, the CNG Committee determined that the companyâ€™s achievement in the other non-financial goal categories and its achievement of a successful separation from Trane warranted a performance score of 150% of its non-financial goals for the year. As a result, the companyâ€™s aggregate performance score for the 2007 AIP (assuming a 70% weighting for the financial performance goals) was approximately 130%, and the target awards for each named executive officer were adjusted upward by this percentage.

In determining Mr. Esculierâ€™s AIP award of $480,000, Mr. Michelâ€™s AIP award of $208,164, Mr. Figueroaâ€™s AIP award of $244,898, Mr. Vartyâ€™s AIP award of $144,115 and Dr. Wiehenâ€™s AIP award of $68,906, the CNG Committee also considered each executiveâ€™s individual performance. Under the AIP guidelines, each executive is graded on a scale of 1 to 5. Each score corresponds to a percentage range that is then applied to the executiveâ€™s target award, as adjusted by the companyâ€™s performance score, as discussed immediately above. A poor individual performance score can result in no further adjustment, and a high individual performance score can result in the executiveâ€™s adjusted target award being further adjusted an additional 200%. Mr. Esculier presented the individual performance scores for each of the other named executive officers to the CNG Committee for their approval. For Messrs. Figueroa and Michel, the award amounts include an extra 15.3% as required under Belgian law with respect to vacation pay.

With respect to Mr. Esculierâ€™s AIP award, the CNG Committee considered his ability to lead the company following its Spin-off from Trane to its current position as an independent public company and noted the fact that the company was able to retain all of its executive talent after the Spin-off. For his 2007 AIP award, the CNG Committee met with the Chairman of the Board and the other independent members of the Board and, as a group, they determined that Mr. Esculierâ€™s individual performance merited an additional 15% upward adjustment to his AIP award.

Long-Term Incentives

Pursuant to the Omnibus Incentive Plan, the CNG Committee has authority to establish cash-based long-term incentive programs for our executive officers, including our named executive officers. The performance period is traditionally three years, and performance goals will generally include three to four of the following measures: sales, gross revenues, gross margins, earnings per share, internal rate of return, return on equity, return on capital, net income (before or after taxes), management net income, operating income, operating income before interest expense and taxes, cash flow and free cash flow. Our named executive officers continue to participate in long-term incentive programs that were adopted by Trane and that had, by their original terms, performance periods that extended past the effective date of the Spin-off. In 2008, our CNG Committee approved a long-term incentive program designed to promote both the achievement of long-term performance goals as well as retention by linking our executive officers wealth more closely to the performance of our stock price. It is anticipated that, under the program, approximately 70% of the value of any executive officerâ€™s long-term incentive compensation will be comprised of annual equity awards split evenly between stock option awards and restricted stock units, both of which will vest ratably over a three year period. The remaining 30% of the value of an executive officerâ€™s long-term incentive compensation will be comprised of the executiveâ€™s target cash LTIP award, the attainment of which will be tied to the achievement of certain financial and non-financial goals over a three-year performance period.

2005-2007 Cash Long-Term Incentive Program

Our Chief Executive Officer participated in the Trane 2005-2007 cash LTIP, which was based upon the performance of Trane against certain financial and strategic goals. At its meeting on February 5, 2005, the Trane MDC Committee determined the maximum amounts payable to officers of Trane (which, at that time, included Jacques Esculier) in respect of LTIP awards for the 2005-2007 performance period by establishing a pool equal to 2.0% of 2007 Trane segment income with 20% of the pool allocated to the Trane Chief Executive Officer and the remainder allocated evenly among the other executive officers. The LTIP pool established by the formula described above was not necessarily an expectation of awards that would be paid. It represented the maximum amount that the Trane MDC Committee could approve as performance based compensation in accordance with Section 162(m) of the U.S. Internal Revenue Code. At its first meeting in July 2007, our CNG Committee approved an adjustment of the LTIP pool to include 2.0% of segment income for Trane through July 2007 and 0.5% of WABCO EBIT for the period of August-December 2007. Achievement of Trane segment income of $753,700,000 for the seven-month period ending July 31, 2007 and 0.5%, or $112,400,000, of WABCO EBIT for the period of August-December 2007, created a maximum LTIP award of $1,901,911 for WABCOâ€™s Chief Executive Officer. Our Chief Executive Officerâ€™s target cash LTIP award is fixed by the terms of his employment contract. See â€śIncreases to Our Chief Executive Officer and Chief Financial Officerâ€™s Cash Compensation in Connection with the Spin-offâ€ť above.

For 2005-2007, the Trane MDC Committee also administered a long-term incentive program for non-officer executive participants. WABCOâ€™s named executive officers, excluding the Chief Executive Officer, participated in this plan. The financial goals used by Trane in the 2005-2007 LTIP related to sales growth, earnings per share and free cash flow. A goal with respect to strategic initiatives was also established. Each of these four goals was weighted equally in determining payouts under the LTIP. Payouts are based on the level of goal achievement multiplied by LTIP targets. LTIP targets are established for each participant as a percentage of base salary and in the case of Messrs. Esculier, Michel and Figueroa such percentages are stipulated by their respective employment agreements. See â€śIncreases to Our Chief Executive Officer and Chief Financial Officerâ€™s Cash Compensation in Connection with the Spin-offâ€ť above. None of the other named executive officers have contractually guaranteed LTIP target award percentages. Financial performance results are expressed as the actual percentage growth over the three-year period versus plan percentage growth over the three-year period. The Trane MDC Committee had the discretion to adjust actual performance results for major events that were not included in the plan. At a meeting on February 6, 2008, the Trane MDC Committee certified the results for the performance period. The Trane MDC Committee calculated performance against the stated objectives by taking into account the full performance period results for Trane and WABCO, but excluded the last three months of 2007 from the results of the Bath and Kitchen business that was sold by Trane. Thus, for purposes of determining LTIP payouts, 2005-2007 results were $11.8 billion of sales, $3.24 of earnings per share and $647 million of free cash flow against goals of $10.3 to $11.0 billion for sales, $3.03 to $3.37 for earnings per share, and $636 million to $673 million for free cash flow. In addition, the Trane MDC Committee determined that Trane had achieved 125% of its strategic goals for the performance period. Assuming equal weighting for each of these four categories, the Trane MDC Committee determined that Trane had achieved 108.1% of its target goals and approved payouts at this percentage.

In using negative discretion to determine actual LTIP payments to the Chief Executive Officer, within the maximum payouts established under the pool for the 2005-2007 performance period, our CNG Committee took into consideration performance against the goals established for the non-officer LTIP.

Based upon these certified results, our CNG Committee, on February 22, 2008, approved the following awards to our named executive officers under the 2005-2007 LTIP: Mr. Esculier ($398,919), Mr. Michel ($81,281), Mr. Figueroa ($100,048), Mr. Varty ($71,732), Dr. Wiehen ($216,850). While our CNG Committee does have discretion to adjust payout percentages up or down by 25%, it chose not to exercise its discretion. Since the base salaries and cash LTIP target percentages for both Mr. Esculier and Mr. Michel were modified during the performance period, their post-Spin-off base salaries and cash LTIP target percentages were applied to the last five months of the performance period to arrive at their final cash LTIP target percentages. For Messrs. Figueroa and Michel, the award amounts include an extra 15.3% as required by Belgian law with respect to vacation pay.

Equity-Based Long-Term Incentives

In 2007, our named executive officers received two separate grants of equity awards. The first award was granted in February 2007 by Trane as part of its long-term equity incentive program and consisted of stock options that vest ratably over the three years from the date of grant. The second award was granted as part of the Foundersâ€™ Grants made in connection with the Spin-off on August 1, 2007 and consisted of a combination of stock options and restricted stock units, both of which will vest ratably over the three years from the date of grant. See â€śFoundersâ€™ Grantâ€ť below and the Grants of Plan-Based Awards table.

Conversion of Outstanding Trane Equity into WABCO Equity

Each of our named executive officers used to be an employee of Trane and previously received Trane equity incentive awards. In connection with the Spin-off, and in accordance with the requirements of the Trane equity plans under which these awards were made, Traneâ€™s MDC Committee approved equitable adjustments with respect to stock options and restricted stock units relating to Trane common stock held by our named executive officers. These equitable adjustments were intended to preserve the economic value of the awards.

With respect to stock options granted prior to 2007 (other than incentive stock options), all such options were adjusted into two separate options, one relating to WABCO common stock and one relating to Trane common stock. Such adjustment was made so that immediately following the Spin-off (i) the number of shares relating to the WABCO option would be equal to the number of shares of WABCO common stock that the option holder would have received in the Spin-off had the Trane options represented outstanding shares of Trane common stock and (ii) the per share option exercise price of the original Trane stock option was proportionally allocated between the two types of stock options based upon the relative per share trading prices of the WABCO and Trane common stock immediately following the Spin-off. The WABCO stock options issued as part of this adjustment and the remaining Trane options continue to be subject to their existing terms and conditions, including vesting schedules. Further, for purposes of vesting and the post-termination exercise periods applicable to such stock options, Traneâ€™s MDC Committee determined that continued employment with WABCO will be viewed as continued employment with the issuer of the options.

Grants of stock options with respect to Trane common stock that were made to our named executive officers in 2007 prior to the Spin-off were equitably adjusted so as to relate solely to the common stock of WABCO. The WABCO stock options issued as part of this adjustment continue to be subject to their existing terms and conditions, including vesting schedules. Traneâ€™s MDC Committee determined that it was equitable to adjust these options into options which relate solely to WABCO shares due to the fact that, in the case of stock options granted in 2007, the options were granted at a time when the Spin-off had already been announced.

Grants of restricted stock units based upon Traneâ€™s common stock were equitably adjusted (in accordance with the requirements of the Trane plan under which the award was made) into restricted stock units based upon WABCOâ€™s common stock. The number of shares of WABCO stock subject to the converted restricted stock unit was adjusted so that the value of the WABCO stock subject to the award immediately following the Spin-off was equal to the value of the shares of Trane common stock subject to the original restricted stock unit immediately prior to the Spin-off.

Foundersâ€™ Grant

We made a special equity award, referred to as the Foundersâ€™ Grant, to approximately 210 employees, including our named executive officers, and the Chairman of our Board, effective on the date of the Spin-off. We believe the Foundersâ€™ Grant served to foster an ownership culture and immediately align the interests of our employees and shareholders, as well as to serve as a retention tool for key management talent. Fifty percent of the award was in the form of stock options and fifty percent was in the form of restricted stock units. Generally, these equity awards will vest, subject to continued employment with the company, in three annual increments on each of the first three anniversaries of the date of grant. The grant date fair value of the equity awards given to our named executive officers in the Foundersâ€™ Grant can be found in the footnotes to the Grants of Plan-Based Awards table below.

Retirement Benefits

We have established a tax qualified 401(k) plan, in which all of our U.S. employees, including Messrs. Esculier and Varty are eligible to participate. In addition, all employees whose eligible compensation exceeds limits imposed by the U.S. Internal Revenue Code participate in Supplemental Savings Plan. Under the Supplemental Savings Plan, the company credits 3% on eligible compensation between the tax code limits and $250,000 plus a matching contribution of up to 6% on all eligible compensation in excess of the tax code limits, based upon the employeeâ€™s contribution election to the tax qualified 401(k) plan. For Mr. Esculier, we credit 3% on all eligible compensation in excess of the tax code limits.

Messrs. Michel and Figueroa participate in a Belgian tax-qualified defined contribution plan and Dr. Wiehen participates in a German defined benefit pension plan. These plans are mandatory for all employees in the Belgian and German subsidiaries where Messrs. Michel, Figueroa and Wiehen perform their duties.

Perquisites

We provide perquisites that we believe are reasonable, competitive with our peer group and consistent with our overall compensation philosophy. In January 2008, the CNG Committee and our independent board members approved changes to our perquisite compensation that include reimbursement for financial planning for our named executive officers and increased life insurance benefits for certain of our executive officers, including our named executive officers.

MANAGEMENT DISCUSSION FROM LATEST 10K

Description of the Company and Its Products

WABCO is a leading provider of electric and electromechanical products for the worldâ€™s leading commercial truck, trailer, bus and passenger car manufacturers. We manufacture and sell control systems, including advanced braking, stability, suspension, transmission control and air compressing and processing systems, that improve vehicle performance and safety and reduce overall vehicle operating costs. Our largest-selling products are pneumatic anti-lock braking systems (ABS), electronic braking systems (EBS), automated manual transmission systems, air disk brakes and a large variety of conventional mechanical products such as actuators, air compressors and air control valves for heavy- and medium-sized trucks, trailers and buses. We also supply advanced electronic suspension controls and vacuum pumps to the car and SUV markets in Europe and North America. In addition we sell replacement parts, diagnostic tools training and other services to commercial vehicle aftermarket distributors, repair shops and fleet operators.

Separation of WABCO from Trane

The spin off by Trane of its Vehicle Controls Systems business became effective on July 31, 2007, through a distribution of 100% of the common stock of WABCO to the holders of record of Traneâ€™s common stock on July 19, 2007 (the â€śDistributionâ€ť). The Distribution was effected through a separation and distribution agreement which sets forth WABCOâ€™s agreements with Trane regarding principal transactions necessary to separate WABCO from Trane. This agreement also sets forth the other agreements that govern certain aspects of WABCOâ€™s relationship with Trane after the completion of the Separation from Trane and provides for the allocation of certain assets to be transferred, liabilities to be assumed and contracts to be assigned to WABCO and Trane as part of the Separation. Trane distributed all of the shares of WABCO common stock as a dividend on Trane common stock, in the amount of one share of WABCO common stock for every three shares outstanding of Trane common stock to each stockholder on the record date. Trane received a private letter ruling from the Internal Revenue Service and an opinion from tax counsel indicating that the spin-off was tax free to the stockholders of Trane and WABCO.

A significant portion of the expenses to effect the Separation were incurred by Trane, such as investment banking fees, external legal and accounting fees, legal reorganization and restructuring tax costs, and costs to separate information systems. WABCO incurred the following separation costs: indemnification and other tax related costs, stock compensation expense relating to the Distribution, costs associated with early bond redemption, external legal and consulting fees, and other items such as relocation expenses associated with hiring senior management positions new to the Company.

Basis of Presentation

WABCO has historically operated as the Vehicle Control Systems business of Trane. The financial statements included herein have been derived from the financial statements and accounting records of Trane, principally representing the Vehicle Control Systems segment, using the historical results of operations, and historical basis of assets and liabilities of the Vehicle Control Systems segment, prior to the July 31, 2007 spin-off from Trane, in addition to WABCOâ€™s actual results for the period subsequent to July 31, 2007. Historically, stand-alone financial statements have not been prepared for WABCO. We believe the assumptions underlying the allocations included in the financial statements are reasonable.

Executive Overview of Managementâ€™s Discussion and Analysis

We analyze the performance of our business using the following general framework and describe the performance of the business in this context throughout the remainder of this discussion and analysis of financial condition and results of operations.

Salesâ€”We analyze sales activity based on the impact of pricing, volume and mix of our products. The management of pricing conditions and the execution of a strategy to improve sales mix to more profitable products and customers are important to us in order to grow sales and profitability.

Productivityâ€”We identify the impact of key productivity programs in the areas of materials procurement, labor and other productivity programs. The successful execution of productivity programs is important to offset the impacts of price decreases, commodity inflation and other cost escalations.

Commoditiesâ€”We use commodities such as aluminum, copper, zinc and steel in our manufacturing process. The cost of these commodities can have a significant impact on our financial performance.

Investmentsâ€”We analyze the costs for the development of new products, investments in sales and marketing programs and other infrastructure investments in support of productivity improvements. Investments in new products and sales are important to sustaining organic growth.

Please see the following paragraphs â€śResults of Operations for 2007 compared with 2006â€ť and â€śResults of Operations 2006 compared with 2005â€ť for an analysis of our results of operations excluding the effects of foreign exchange translation.

Our Markets and Our Customers

Our sales are affected by changes in truck and bus production, especially in Europe. Europe is our largest geographic market and sales to truck and bus OEMs represent our largest customer group. The table below shows the relationship between our European sales to truck and bus OEMs, which, account for approximately 79% of our global sales to truck and bus OEMs and Western European truck and bus (T&B) production, for the last five years. Sales data is shown at a constant Euro to U.S. dollar exchange rate for year to year comparability and to make comparisons to unit production meaningful.

In general, our sales track directionally with truck and bus builds. However, individual year to year sales changes are also influenced by other factors such as timing of orders and deliveries to T&B OEM customers, application content, new product introduction, price and introduction of new customer platforms. The level of truck build activity is influenced by general economic conditions, including interest rate levels and inflation. On average for the last five years, our European sales have performed 3 percentage points above the change in Western European truck and bus builds.

In regions outside Europe, there is less correlation between our sales and regional truck and bus builds. This is because of our smaller presence (which magnifies changes in content on individual truck platforms) as well as less stringent safety regulations. As other regions adopt additional safety regulations in the future, similar to or approaching Europeâ€™s, we expect the resulting increase in content will bring higher correlation between our regional sales and changes in regional truck and bus production.

Our aftermarket sales account for approximately 21% of total sales and are affected by a variety of factors: content on specific vehicles and breadth of our product range, number of commercial trucks in active operation, truck age, miles driven, demand for transported goods and overall economic activity. On average, our aftermarket sales (on a constant exchange to the U.S. dollar rate) have grown by 8% annually for the last five years as shown in the table below. Our 2007 aftermarket sales were negatively impacted by certain supply chain constraints which improved by the fourth quarter of 2007.

Results of Operations

The following discussion and analysis addresses year-over-year changes in the line items shown in the above paragraph â€śExecutive Overview.â€ť Approximately 93% of our sales are outside the U.S. and therefore, changes in exchange rates can have a significant impact on the reported results of our operations, which are presented in U.S. Dollars. Year-over-year changes in sales, expenses and net income for 2007 compared with 2006 and 2006 compared with 2005, are presented both with and without the effects of foreign currency translation. Changes in sales, expenses and net income excluding foreign exchange effects are calculated using current year sales, expenses and net income translated at prior year exchange rates. Presenting changes in sales, expenses and net income excluding the effects of foreign currency translation is not in conformity with GAAP, but we analyze this data because it is useful to us in understanding the operating performance of our business. We believe this data is also useful to shareholders for the same reason. The changes in sales, expenses and net income excluding the effects of foreign exchange translation are not meant to be a substitute for measurements prepared in conformity with GAAP, nor to be considered in isolation. Management believes that presenting these non-GAAP financial measures is useful to shareholders because it enhances their understanding of how management assesses the operating performance of the companyâ€™s business.

Results of Operations for 2007 Compared with 2006

Sales

Our sales for 2007 were $2.4 billion, an increase of 19.9% (10.5% excluding favorable foreign currency translation effects) from $2.0 billion in 2006. The increase was attributable primarily to increased truck and bus production in Europe, expanded content per vehicle including new applications, global expansion and growth in our aftermarket business. Sales in Europe, our largest market, increased approximately 23.9% (14.2% excluding favorable foreign currency translation effects), which based on our estimate, exceeded the growth in European truck production. Sales decreased in North America, which was less than the decrease in North American truck production. The decrease in the North American truck production was primarily influenced by increased sales volume in 2006 ahead of regulations mandating better emissions standards that became effective in 2007. In Asia and South America sales increased 24.5% and 33.2%, respectively (20.6% and 18.7% excluding favorable foreign currency translation effects, respectively). The sales growth in Asia was driven by an increase in China sales of 106.4% (96.7% without foreign currency translation impact).

Gross Profit

Gross profit increased by $100.0 million ($45.8 million excluding favorable foreign currency translation effects). Also, included in gross profit was approximately $10.1 million of foreign currency transaction losses related mainly to the sale of products in countries (with different currencies) outside of the country where they are manufactured.

Gross profit benefited from volume and mix increases of approximately $64.0 million primarily attributable to the sales increase discussion above, productivity improvements of approximately $48.2 million, and a reduction of warranty expenses of $9.8 million. These improvements were partially offset by sales price decreases of approximately $54.0 million, labor and other cost escalation of approximately $10.0 million, higher spending on streamlining programs of approximately $1.4 million, and other net costs of $0.7 million.

Operating Expenses

Operating expenses, which include selling and administrative expenses and product engineering expenses, increased by $56.8 million ($29.3 million excluding unfavorable foreign currency translation effects). The increase in operating expense was primarily driven by incremental investments in product engineering and new product development programs of approximately $10.6 million, labor cost inflation and escalation of approximately $8.5 million, increases in spending on streamlining programs of approximately $3.1 million and an increase of $2.4 million of expenses due to a change in certain pension obligations. In the second half of 2007, WABCO incurred separation costs of approximately $4.7 million.

Equity in Net Income of Unconsolidated Joint Ventures

Equity in net income of unconsolidated joint ventures decreased $14.2 million to $9.1 million in 2007 as compared to $23.3 million in 2006. The decrease was partially due to WABCOâ€™s joint venture in North America, driven by the production decline in the North American market. As described above, the North American commercial vehicle production decreased in 2007, influenced by increased sales volume in 2006 ahead of regulations mandating better emissions standards that became effective on January 1, 2007. As a result, Meritor WABCO was impacted by lower sales volumes in 2007. Additionally, the decrease was driven by WABCOâ€™s Indian joint venture, SCL, which was mainly driven by difficult market conditions in the non-brakes divisions of the group, start-up costs associated with new business development, and a write-off of one of its investments.

WABCO and its Indian joint venture partner have agreed to separate the non-brakes division from the brakes division through a plan of demerger, which is conditioned on various Indian regulatory and court approvals. If these conditions are met, the brakes business of SCL will be transferred to a new subsidiary, WABCO-TVS (INDIA) Ltd. (â€śWABCO-TVSâ€ť), the shares of which are intended to be listed in India as are the shares of SCL currently. Subsequent to the demerger, it is intended that within a period of two years from such listing, WABCOâ€™s Indian joint venture partner will transfer to WABCO its shares in WABCO-TVS, and WABCOâ€™s percentage ownership in WABCO-TVS is expected to increase to approximately 75-80%. Similarly, during this same period, it is intended that WABCO will transfer to its Indian joint venture partner its shares in SCL post demerger, and WABCOâ€™s percentage ownership in SCL post demerger, which will then consist of the non-brakes division of the joint venture, is expected to decrease to zero.

Other expense, net

Other expense increased by $24.8 million to $35.6 million for the full year 2007 as compared to $10.8 million for the fully year 2006. The increase was primarily attributable to the following items: $13.6 million of charges resulting from the legal reorganization, in connection with the spin-off from Trane, in various countries in the second, third and fourth quarters of 2007, $6.0 million of early-redemption premiums on the $40.0 million outstanding bonds that were redeemed on April 30, 2007, and $0.8 million relating to costs associated with environmental liabilities transferred from Trane. Additionally, contributing to the increase was higher foreign exchange losses on non operating items and higher minority interest expense.

Net Interest/Expenseâ€”Includin g Related Party Interest Expense

Net interest expense (including related party interest expense) was $4.5 million for 2007 as compared with $11.3 million in 2006. The decrease in net interest expense is primarily driven by a $4.7 million decrease in related party net interest expense, which in 2007 only included a partial year of related party interest versus a full year in 2006. Additionally, WABCOâ€™s capital structure at the time of separation was more favorable when compared to 2006.

Income Taxes

The income tax provision for 2007 was $111.3 million. The effective income tax rate was 47.0% of pre-tax income in 2007. The income tax provision for 2006 was $87.9 million, an effective tax rate of 38.9%. The effective income tax rate for 2007 increased primarily due to a provision of $50.7 million related to the separation of the WABCO business from Trane and a charge of $10.2 million related to the net reduction in deferred tax assets pursuant to tax rate changes in Germany, UK and China, partially offset by a $7.5 million benefit as a result of the settlement of a foreign tax audit during the second quarter, and benefits associated with foreign tax planning for 2007 following WABCOâ€™s separation from Trane.

Backlog

Backlog, which represents valid sales orders that have not yet been filled as of the end of the reporting period, was $1.2 billion at the end of the fourth quarter, up 44.2% (or 30.2% excluding favorable foreign currency translation effects) from the fourth quarter of 2006. Backlog is not necessarily predictive of future business as it relates only to some of our products, and customers may still change future delivery dates.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

The following discussion and analysis addresses changes in sales, expenses and pre-tax income for the three and nine months ended September 30, 2007, compared to the three and nine months ended September 30, 2006. Approximately 92% of sales are outside the U.S. and therefore, changes in exchange rates can have a significant impact on the reported results of our operations, which are presented in U.S. Dollars. Quarter-over-quarter changes in sales, expenses and net income for 2007 compared with 2006 are presented both with and without the effects of foreign exchange translation. Changes in sales, expenses and net income excluding foreign exchange translation effects are calculated using current year sales, expenses and net income translated at prior year exchange rates. Presenting changes in sales, expenses and net income excluding the effects of foreign exchange translation is not in conformity with GAAP, but management analyzes the data in this manner because it is useful to them for understanding operational performance of the business. Management also uses data adjusted in this manner for purposes of determining incentive compensation. Accordingly, management believes that presenting information in this manner is also useful to shareholders in understanding the performance of the business. The changes in sales, expenses and pre-tax income excluding the effects of foreign exchange translation are not meant to be a substitute for measurements prepared in conformity with GAAP, or to be considered in isolation.

Third Quarter Results of Operations for 2007 Compared with 2006

Sales

Sales for the third quarter of 2007 were $595.5 million, an increase of 18.0% (9.9% excluding favorable foreign exchange translation effects) from $504.6 million in 2006. The increase was attributable primarily to increased truck production in Europe, expanded content per vehicle and new applications. Sales in Europe, our largest market, increased approximately 23.3% (14.3% excluding favorable foreign exchange translation effects), which based on our estimate, exceeded the growth in European truck production. We estimate that Western European Truck production was up nearly 13% compared to the same period in 2006. Much of this growth continues to be driven by the strong economic development in Eastern Europe translating into increased need for heavy duty, Western European-style commercial vehicles. Sales decreased 31.8% in North America as a result of a decrease in the North American truck production, influenced by significantly increased sales volume in 2006 ahead of regulations mandating better emissions standards that became effective in 2007. In Asia and South America sales increased 24.6% and 40.8%, respectively (21.1% and 24.4% excluding favorable foreign exchange translation effects, respectively). The sales growth in Asia was driven by an increase in China sales of 129.9% (118.2% excluding favorable foreign exchange translation effects) which was primarily driven by a successful introduction of the Companyâ€™s compressor product line in the market as well as the increasing penetration of ABS. Total aftermarket sales growth in the quarter was limited to 14.9% (6.7% excluding the favorable effects of foreign exchange) as a result of supply chain capacity limitations and our need to prioritize fulfilling OEM demand above aftermarket demand.

Gross Profit

Gross profit increased by $17.9 million (an increase of $6.3 million excluding favorable foreign exchange translation effects) in the third quarter of 2007 as compared with the third quarter of 2006. Also included in gross profit was approximately $2.6 million of foreign exchange transaction losses related mainly to the sale of products in countries outside (with a different functional currency) of the country where they are manufactured. Gross profit benefited from volume and mix increases of approximately $11.3 million primarily attributable to the sales increase discussed above and productivity improvements of approximately $9.3 million and the impact of reduced warranty expenses of $3.6 million. These improvements were partially offset by sales price decreases of $12.7 million, labor and other cost escalation of approximately $2.4 million and other costs of $0.2 million.

Operating Expenses

Operating expenses increased by $12.0 million ($5.8 million excluding unfavorable foreign exchange translation effects) in the third quarter of 2007 as compared to the third quarter of 2006. The increase in operating expense was primarily driven by labor cost inflation and escalation of approximately $2.5 million and incremental investments in the sourcing and product engineering field of approximately $1.3 million offset by a decrease in spending on streamlining programs of approximately $0.7 million. During the third quarter WABCO incurred separation costs of approximately $2.6 million of operating expenses.

Streamlining Expenses

The Company incurred $2.7 million of streamlining expenses during the third quarter of 2007 of which $2.6 million is associated with severance relating to 2007 plans and $0.1 million pertains to 2006 plans. The majority of the 2007 plan is associated with administrative functions, and $1.8 million has been charged to selling and administrative expenses and $0.9 million was charged to cost of sales. The Company incurred $3.4 million of streamlining expenses during the third quarter of 2006, of which $3.3 million was charged to selling and administrative expenses and $0.1 million was charged to cost of sales.

Equity in Net Income of Unconsolidated Joint Ventures

Net income of unconsolidated joint ventures decreased by $5.3 million to a loss of $1.8 million in the third quarter of 2007 as compared to income of $3.5 million in the third quarter of 2006. The decrease was primarily driven by WABCOâ€™s Indian joint venture, Sundaram-Clayton Ltd. (â€śSCLâ€ť). WABCO had to recognize a loss in the third quarter of $3.6 million for SCL which was mainly caused by start up investments in a new motorcycles plant in Indonesia, a write-off of one of its investments and tax adjustments. The Meritor WABCO joint venture in North America also contributed to the decrease. As described above, the North American commercial vehicle production decreased in the third quarter of 2007, by comparison to increased sales volume in 2006 ahead of regulations mandating better emissions standards that became effective on January 1, 2007. As a result, Meritor WABCO was impacted by lower sales volumes in the third quarter of 2007.

WABCO and its Indian joint venture partner have agreed to separate the non-brakes division from the brakes division through a scheme of demerger, which is conditioned on various Indian regulatory and court approvals. If these conditions are met, the brakes business of SCL will be transferred to a WABCO subsidiary, WABCO-TVS (INDIA) Ltd. (â€śWABCO-TVSâ€ť), the shares of which are intended to be listed in India as are the shares of SCL currently. Subsequent to the demerger, it is intended that within a period of two years from such listing, WABCOâ€™s Indian joint venture partner will transfer to WABCO its shares in WABCO-TVS, and WABCOâ€™s percentage ownership in WABCO-TVS is expected to increase to approximately 75-80%. Similarly, during this same period, it is intended that WABCO will transfer to its Indian joint venture partner its shares in SCL post demerger, and WABCOâ€™s percentage ownership in SCL post demerger, which will then consist of the non-brakes division of the joint venture, is expected to decrease to zero.

Other expense, net

Other expense increased by $5.3 million to $7.2 million in the third quarter 2007 as compared to $1.9 million in the third quarter of 2006. The increase was primarily attributable to separation costs of $4.1 million of which $3.7 million related to legal reorganization costs incurred in various countries, $0.3 million related to costs associated with environmental reserves transferred from American Standard, and $0.1 million of other costs.

Income Taxes

The income tax provision for the third quarter of 2007 was $50.0 million, or 100.6% of pre-tax income, compared with a provision of $15.8 million, or 29.3% of pre-tax income in the third quarter of 2006. The effective tax rate for the third quarter of 2007 increased primarily due to a provision of $37.1 million related to the separation of the WABCO business from American Standard and a charge of $8.9 million in a deferred tax asset related to the reduction in German tax rates enacted in the third quarter of 2007 but effective January 2008.

The income tax provision reflects certain foreign tax planning that benefits WABCO in 2007 and future years following the separation of WABCO from American Standard. The tax benefit associated with this planning is reflected in the annual effective tax rate for 2007. Additionally, the accompanying September 30, 2007, balance sheet does not reflect the benefit of certain substantial foreign net operating loss carry forwards which are available to WABCO following the separation. These losses which amount to approximately $315 million result in a deferred tax asset of approximately $107 million, against which a full valuation allowance has been provided because it has been determined as of September 30, 2007, that it is more likely than not that the losses will not be realizable in the foreseeable future.